The question underscores bitcoin's problem: What started as an experiment in virtual currency is now a high-risk commodity

InfoWorld|Feb 14, 2014

What a difference a DDoS attack or two can make. Attacks on bitcoin exchanges Bitstamp and Bulgaria-based BTC-e, coming on the heels of Mt. Gox's decision to suspend transactions last week because of a bug in bitcoin's software, have unsettled markets for the virtual currency. Last week, a bitcoin was valued in the mid-$900s after reaching highs exceeding $1,000 in January. Today, it's hit a low of $302.

Members of the bitcoin industry were quick to emphasize that they expect the problems to be resolved soon and pointed out that the "transaction malleability" bug cited in Mt. Gox's decision to shutter operations is a long-known technical issue in bitcoin's software, and the exchange should have been prepared for it. "This is a good reminder that bitcoin is still young and experimental," the Bitcoin Foundation said.

Max Hampel, who runs the Coinwatch blog, expressed confidence in the currency. "Bitcoin is still secure, the network is still working," he told Business Insider. "The developers are working on a fix to this problem, which is not even as grave as portrayed by Gox. These are just minor problems that will be solved as bitcoin evolves. Don't panic, everything still works."

While it's true that no bitcoins were stolen and bitcoin wallets were not affected, the attacks are another black eye for the currency whose reputation in the minds of many is based on its use by the notorious Silk Road online black market for illegal drugs.

That really gets to the heart of the matter: When discussing bitcoin, it helps to be explicit about which bitcoin you mean -- the virtual currency or the speculative commodity?

As a virtual currency, bitcoin is highly attractive to libertarians, who love its lack of regulation, and others suspicious of banks and the Federal Reserve. Its primary attractions for e-commerce are that it's safe -- consumers don't have to reveal personal information, reducing opportunities for identity theft -- and cheap for small businesses struggling under the high fees associated with credit cards.

Wired.com even sees it as a potential equalizer for the country's homeless, since "the great thing about bitcoin is that you can set up a wallet without an ID or a street address. And once you start filling this wallet, there are plenty of ways of converting bitcoins into cash and food and other goods, all without identification."

Sure there are those who say it's nonsense, that bitcoin is a raging bubble not unlike the "tulip craze" of the 1630s. Blah, blah, blah. It is not. In fact, it is far from it. Bitcoin is not only here to stay, it is something that if you get in now can make you rich. It is simply the most exciting financial story to come along since the dot-com boom.

Keep in mind -- what MSN Money remembered as the dot-com boom, others call the dot-com bubble. Mark Williams, who teaches finance at the Boston University School of Management and used to be senior vice president of a commodity trading firm in Boston, is perhaps bitcoin's harshest critic. Williams predicted in December that in the first half of 2014, bitcoins would lose almost 99 percent of their value:

What we see is considerable risk associated with bitcoin. At least with a commodity like power, natural gas, or oil, there's an underlying value. That product can be used for something. With bitcoin, it's a virtual commodity, so there's no backing. In essence, Bitcoin is worth something as long as you or I are willing to sell things for it. But if you say I'd rather have $1,000 than a bitcoin, bitcoin is going to drop like a rock.

JP Morgan Securities is so unimpressed with bitcoin that foreign-exchange strategist John Normand issued a warning this week, calling it "vastly inferior to traditional, fiat currency" as a unit of account and a store of value due to its extreme volatility. It should be noted, however, that JPMorgan Chase recently patented a digital payment system that could rival bitcoin.

The Telegraph mourns the fact that bitcoin has been hijacked by speculators, threatening the very reasons it was created:

People are moving their money in and out at a blinding rate. Traders have turned their attention to it (Bank of America began publishing research last week). The millionaire Winklevoss twins ... are launching a fund for people to invest in Bitcoin. This has given the currency a sense of credibility, but also threatens to turn it into a Ponzi scheme: Its price fluctuates manically.... This volatility threatens to kill Bitcoin's potential.

The Huffington Post concurs that "one day, those who have accumulated millions of dollars will slowly but surely start selling their Bitcoins and the music will stop. There are no chairs in this musical game; all will fall down without any support."

If you're looking for an alternative to traditional currency for online transactions, remember that bitcoin is a beta system still working out its kinks. If you're in the market for the next get-rich-quick investment, take your best guess whether bitcoin fits the bill, and remember: With any Ponzi scheme, it's all in the timing.